On Aug 15 2011, Google (NASDAQ:GOOG) had announced its plan of acquiring Motorola Mobility for a total consideration of $12.5 billion. After close to nine months, Google completed the acquisition. Motorola Mobility was formerly known as the ‘Mobile Devices’ within Motorola Solutions. This acquisition was in-line with Google’s strategic move i.e. to strengthen its patent portfolio. Motorola Mobility had 17,000 patents with 7,500 more patents pending at the time of acquisition announcement.
Would Google stock price hit $1,000 ?
Currently, one critical question in the minds of investors is which amidst Google and Apple will hit the $1,000 price first. During Mar 2012, all three stocks i.e. Apple (NASDAQ:AAPL), Priceline (NASDAQ:PCLN) and Google (NASDAQ:GOOG) were trading within the price range of $600 - $740. Recently, Priceline touched the $1,000 mark driven by strong fundamentals, with earnings growth of more than 50% a year, on an average for the past five years. However, Google’s stock price has not yet reached $1,000, as Motorola’s profitability is weighing heavily on Google’s bottom line.
Motorola Mobility has been weighing heavily on Google’s bottom line
As we can see in the above chart, Google’s FY 2012 operating margin declined by 4.6% dragged by Motorola's additional operating expenses. Although the move hasn't really hurt Google’s stock price over the past two years, profitability is a big concern in the minds of investors. During Jun 2013 quarter, Motorola business reported an operating loss of $218 million i.e. 16% higher loss than Jun 2012. Samsung’s mobile business is more profitable than Google’s entire business. During second quarter of 2013, Samsung’s profits from mobile division jumped 52%. According to Neil Mawston from Strategy Analytics, Samsung captured almost 95% of all android profits during the first quarter of 2013.
Moto X sales could generate profits for Google
If the Moto X handset sales go as planned, there’s a huge opportunity for Google to turn Motorola into a profit-making company. Currently, around 100,000 Moto X units are getting shipped per week. At this current volume, Moto X could sell a minimum of 5.2 million units annually. The key factor which would help in the success of Moto X is - similar pricing to that of Galaxy S4 and iPhone5. According to Goldman Sachs, the cost of manufacturing such a handset is around 75%, which means Google can pocket 25% for each phone sold. If Google can sell as planned (5.2 million phones), then it can make around $260 million as profits against Motorola’s current loss. $260 million profits would mean 2.5-3% upside to the net income of Google Inc.
Google's Current Valuation
Currently, the LTM P/E of Google (including Jun 2013 EPS) stands at around 24.8x. If the company’s stock price has to reach an upside of 12.7% (i.e. $1,000) from Oct 1 2013 closing of $887.0 in the next six months, then the LTM EPS has to be $43 (starting from Mar 2013 to Dec 2013). Mar 2013 and Jun 2013 EPS of Google adds up to $19.5 leaving a balance of another $20.8. Regarding Sep 2013 and Dec 2013 EPS, we have assumed the EPS to grow at an average Y/Y rate of 5% (i.e. Average rate of Sep 2013 and Dec 2013 EPS Y/Y growth rate during FY 2012 and FY 2011). So FY 2013 EPS adds up to a total of $35.4. Translating it to the current price through LTM P/E would mean a minimum (conservative) price of $878. Assuming that the company margins would improve by ~3% in FY 2013 through savings in SG&A and R&D costs (now that Moto X is out in the market), we can expect at least 3-4% upside to its net income, thereby improving the profitability. As described above, Moto X would add another 3%. Google, being a market leader, with improved profitability (most of it arising from the turnover of Motorola from losses to profits), it can command 1-2x P/E higher than what it is currently commanding. If all these three factors were to happen in Google's favor, we can say that Google’s share price can easily touch $1,000.
We are continuing our positive outlook towards Google stock and looking for more direction from the company during the next earnings call. The intrinsic value could go up significantly to $1,000+ if Moto X really kicks off in the market.
To see Google’s latest stock price movement, click here (NASDAQ:GOOG)